Question

Summary information from the financial statements of two companies competing in the same industry follows. Barco Kyan Company Company Data from the current year-end balance sheets Assets $ 19,500 $ 34,000 Accounts receivable, net 37.400 57,400 Current notes receivable (trade) 9. 1097 .209 Merchandise Inventory 84,449 132.500 Prepaid expenses 5.900 0.959 plant assets.net 299,000 304,400 Total assets 5465, 4405542,450 Barco kyan. Company Company Data from the current year's income statement Sales $770,000 $880, 200 Cost of goods sold 585, 109 632,500 Interest expense 7, 900 13,000 Income tax expense 14,899 24,300 Net Income 162 209 210.499 Basic earnings per share 4.51 5111 Cash dividends per share $ 29, 300 $54,200 Liabilities and Equity Current liabilities Long-term notes payable Common stock, 35 par value Retained earnings. Total liabilities and equity $ 51.340S 03300 8.800 101.000 180.000 200.000 123,300 142,150 5445,440 542,450 Beginning-of-year balance sheet data Accounts receivable, not Current notes receivable (trade) Merchandise inventory Total assets Common stock55 par value Retained earnings 55,600 398,000 180,000 98,300 107009 382,500 200,00 93.000 2a. For both companies compute the profit margin ratio. (b) total asset turnover (return on total assets, and return on common stockholders' equity. Assuming that share and each company's stock can be purchased at $75 per share, compute their (e price earnings ratios and dividend yields (Do not round Intermediate calculations. Round your answers to 2 decimal places.) 2b. Identity which company's stock you would recommend as the better investment Complete this question by entering your answers in the tabs below. ZA Prof Mar 24Tot Asset 2A Ret on Tot Ratio Tum Assets 2A Ret on Com Stock 2A Price Bam 1 ZA DIV Field Aow vious Ratio Reg 28 For both companies compute the profit margin ratio < Prev 2 o 4 H Next >

Answer 1

Req 2a.

a.Profit margin ratio

Gross profit margin ratio=(Sales- COGS)/sales

Barco company kyan company

= (770000-585100)/770000 =(880200-632500)/880200

=24.01% =28.14%

b.Total assets turnover:

Total assets turnover ratio= Sales/ Avg assets

Avg assets= (opening assets at the beginning of the period+ closing assets)/2

1. Sales =770000 =880200

2. Avg assets ={(29800+55600+398000)+ ={(54200+107400+382500)+(34000+57400+7200+132500+6950+304400)}/2

(19500+37400+9100+84440+5000+290000)}/2

=464420 =543275

3.Total assets turnover =1/2

=1.68 times =1.62 times

c. Return on total assets(ROA)

ROA= Net income/ avg assets

avg assets as per 2 above

Operating profit befor tax = 162200+14800(tax expense) =210400+24300( tax expense)

=177000 =234700

ROA =177000/464420 =234700/543275

=38.11 %     =43.20 %

d. Return on common stockholders equity/Return on equity(ROE)

ROE= Net income / Shareholders equity

Shareholders equity = common stock+ retained earnings

=162200/(180000+123300) =210400/(206000+142150)

=53.48% =60.43%

e. Price earnings ratio( PE ratio)

PE ratio= Price per stock / earnings per stock

= $ 75/$ 4.51 = $ 75/ $5.11

=16.63 times =14.68 times

f. Dividend yields

Dividend yield = dividend per share/ share price

= $3.81/$75 =$ 3.93/ $ 75

= 5.08% =5.24%

2b.Better company..

Profit margin ratio , ROE and ROA are favarable for the kyan company along with favaroble PE ratio and dividend yield . barco company has favaroble assets turnover . It is kyan who have favaroble ratios and also high margin ratio. hence it advisable for going Kyan company.. It also has lower PE which is it is less coslty stock when compared to barco